How ITC is working its way down in FMCG markets - The Economic Times
October 30, 2011
When ITC chairman YC Deveshwar told shareholders at the company's 100th annual general meeting in July that he wants to turn the non-cigarette FMCG business profitable before he hangs up his boots in six years time, the 64-yearold was most probably just buying himself breathing time - a lot of it.
Today, despite its eponymous stature in the cigarette business, nearly 21% of ITC's Rs 21,168 crore of 2010-11 net revenues come from its non-cigarette FMCG business. In the past five years, this segment - which includes everything from packaged food to personal care, lifestyle retailing to stationery, safety matches and agarbatti - has emerged as ITC's largest revenue engine, clocking a growth of 35% CAGR. In 2010-11, the division clocked revenues of Rs 4,482 crore, up from Rs 3,014 crore in 2008-09.
More importantly, the company has been cutting its losses in the non-cigarette FMCG business to Rs 297 crore in 2010-11 from Rs 483 crore in 2008-09.
What will also give Deveshwar great confidence in the future of these businesses is that things are looking up for quite a few of them, despite rising input costs. The food business, for instance, recorded its maiden profit last fiscal and analysts say the stationery product business is not too far from profitability. The personal-care business is also reducing losses despite the growing investment in new product launches and marketing. In fact, leading broking firms like HDFC Securities and Angel Broking are betting that ITC's non-cigarette FMCG business would breakeven by next financial year.
"The losses are reducing due to favourable product mix, higher realisations and a combination of smart sourcing and cost saving across supply chain," says broking firm Sharekhan analyst Kaustubh Pawaskar.
Top-down Strategy
Company officials attribute this turnaround to the company's "top-down" approach to cracking categories in the FMCG business. It's a strategy the company perfected in its mainstay cigarette business and has replicated in the personal care, food and stationery operations.
Typically, ITC enters any new category at the premium end, builds its brands, and then rolls out the mass range. For example, it entered the stationery segment with the premium Paperkraft range in 2002 and then followed it up with the massmarket Classmate range the next year. By 2007, Classmate became the largest notebook brand in the country. "Indian consumers love premium and imported products. Hence, had we started from the bottom end of the market, consumers would have never accepted us when we entered the premium segment, "ITC's executive director Kurush N Grant told ET on Sunday during a recent interaction.
Add to that the advantages of better margins and a juicy sales mix, its no wonder that ITC is replicating the strategy across categories. ITC entered the food business in 2001 with premium ready-to-eat brand Kitchens of India and in 2003, launched the Aashirvaad range of mid-segment ready meals at a price range of Rs 35-50.
Similarly, in 2005 when it forayed into the personal-care market, it was through the super-premium brand Essenza Di Wills in perfumes, bath and body care. This was followed by premium brand Fiama Di Wills in 2007, the mid-market brand Vivel and eventually the mass-market Superia.
As per a recent HDFC Securities report, ITC has some 6% market share in the fiercely competitive soap market and is increasing its 2-3% market share in shampoos. While staples, confectionery, biscuits have become profitable, the Bingo! range of snacks is close to breakeven.
Smart Backward Integration
ITC has great ambitions for this place. It plans to invest Rs 8,000 crore in the noncigarette FMCG segment over the next 7-8 years. Deveshwar has clearly laid the goal: to become the country's largest non-cigarette FMCG company.
It's an audacious goal that will see ITC take on global behemoths like Unilever, Procter & Gamble, PepsiCo and Nestle, and a bunch of domestic players like Godrej, Britannia and Dabur.
Over the years, ITC has diligently worked on building what's now one of its key strengths - backward integration. It sources commodities through its e-Choupal with its 4-million-plus farmer network and uses its expertise in hotel business (ITC owns the second largest hotel chain in India) to understand the Indian palette for the food business. Its paper mills supply paper and recycled board for notebooks and the packaging and printing division packaging for all FMCG products.
In short, it has reasonable control over input costs and margins, which have become the biggest headaches for it rival consumer-goods makers.
"Sourcing integration acts like an insurance in times of high inflation. But what will be more important is to win the consumers. In the long run, ITC's consumer franchisee must stay intact and then it can play magic with its back-end integration," says Devendra Chawla, president (food & FMCG) at Future Group, the country's largest retailer. Industry watchers also feel it will be an uphill task for ITC to grow its personalcare business unless it rapidly gains its distribution and reach.
"The way Unilever has made deep penetrations, it will take several years for ITC to replicate its scale. Of course, it can use its wide penetration of panwallahs and cigarette shops to generate trials and ensure that the products reach nearby kiranas. But reaching smallest of kiranas will take time," says the CEO of a top domestic FMCG company, requesting anonymity.
ITC is aware of that. It has already started tapping its eponymous cigarette distribution channel. It's also focusing on creating product differentiation in the personal-care market. It is closely studying consumer needs to develop value-added products.
All it Wants Now is Some Time
"It's true we have been a late starter in the personal care business. But we are here to stay and need to give that much time to grow the business," says Grant. Given ITC's hurry to make it big, that time may be not too far away.
